Performance-Based Marketing Is Bad For Clients

A recent article from the Think With Google marketing blog included a baffling statistic: 41% of agencies now use a performance-based compensation model. This is incredible, as performance-based fee arrangements almost never benefit clients.

Marketing Isn’t Magic

Most marketing agencies do the same thing – the basics:

• Businesses know that pay-per-click ads drive revenue, but not every business has the staff or experience to manage pay-per-click ads effectively. An agency can fill in a skills gap, offer strategic guidance, and provide good value as a result.
• Businesses know content is important, but don’t have the staff to generate effective content at scale. Agencies do.
• Businesses know that email marketing and social media marketing are important, but don’t usually have a system for consistently sending emails, interacting on social media, etc. Agencies can handle it instead.
• Businesses know messaging needs to be constantly tested and refined, but don’t do it enough. Most agencies are good at this.
• Every business knows the value of an outside party offering strategic advice and consulting, another thing agencies can do.

Agencies exist because they offer businesses expertise and specialized skills they don’t have…but none of this expertise or skill is magic. Anyone can learn marketing; The trick is to do things consistently and at a high level. That’s what gets results – not some magic formula or special insight.

This is to say, when agencies promise a clever system or amazing strategy, it’s almost certainly bullshit. Businesses need agencies to help them do the marketing basics well.

Performance-Based Marketing Is A Lie

Most performance-based agencies pitch their services in a really simple way: “If we don’t help you grow, we won’t make any money…and that’s how you know we’re going to help you grow.”

It sounds great, but it’s a lie:

• Growth can happen even when the marketing agency does nothing. Businesses grow (and shrink) for all sorts of reasons that have nothing to do with marketing: competition, price changes, product availability, economic changes, shifting trends, search algorithm changes…all of these things can play a significant role in growth, and all are outside an agency’s control.
• Growth can be “front-loaded” very easily. If Yeti* – a business with a great brand name and carefully cultivated image – decided to discount all of their products 50%, sales would skyrocket in the short term. But the perceived value of their products would be eroded and long-term sales would suffer. That kind of “growth” isn’t really growth at all.
• There are tricks for taking credit for sales that already happening. A performance-based agency might suggest using a different analytics tool or tracking data differently, with an eye toward taking credit for sales already happening on other channels. Growth isn’t really growth, but their contract will still require payment.
• There’s money to be made hoping for random growth. At least one performance agency we’ve encountered confessed to signing up dozens of new clients a month, doing almost no work for each, and then hoping that one or more of them would have a random growth spurt. Most of the clients cancel in a few months, but the random growth spurt client generates good payments for months or even years.

Of course, good marketing will usually boost sales. But good marketing can happen for a flat fee – it doesn’t just happen when marketers get a slice of revenue.

*Side note: We love Yeti’s marketing and use them as an example often. Check out this blog post on the Wholesale Sales Channel for more on the cooler company.

Performance-Based Marketing Fees Are Always Ripping Someone Off (Usually Clients)

When a business hires a marketing agency for a flat fee, they’re paying for a mix of task completion, business support, and consulting. If the agency is effective, the business should see increased sales, improved customer satisfaction, reduced support requests, and increased brand awareness.

But when the marketing agency is hired for a percentage of sales, everything changes:

• Marketing that generates immediate sales gets top priority
• Marketing that improves customer satisfaction or reduces support requests rarely or never gets done
• Marketing that facilitates long-term growth rarely or never gets done (contract renewal isn’t typically guaranteed, so why bother with long-term work?)
• Consulting and strategic advice are always focused on short-term results

In fact, performance-based marketing agencies have strong incentives to do as little as possible: performance agency profits are maximized when they do the bare minimum to grow sales.

Traditional agencies, on the other hand, have a strong incentive to do good work. Traditional agencies aren’t being evaluated solely on sales – they’re also being evaluated on output and support, so they have to offer these things, too. And because traditional agencies are evaluated on more than growth, they don’t get a contract renewal if they don’t deliver.

And in the rare case where a performance-based marketing agency actually does something good, they often get burned by clients who say “thanks for the help!” and “you’re fired!” Performance agencies that are worth a damn don’t usually stay performance-based. After getting burned a couple of times, they start charging fees like most established agencies.

Performance-Based Marketing Is Only Effective When There’s a Marriage…But Marriage Is Hard

In those situations where performance-based marketing works, it’s usually because the agency and the client are effectively partners. They’re contractually “married” to one another, with stiff penalties for businesses who fail to renew the agency’s contract if growth goals have been met.

While this can certainly be beneficial for all involved, marriage ain’t easy. Personnel changes, economic changes, and new competition all have outsized impacts when a business and an agency are contractually joined at the hip. If the business hires a new marketing manager or the agency loses a key staffer, the magic could be lost.

And while it’s true that great things in business are never done by one person, businesses don’t have to partner up with an agency and promise them a slice of revenue to get good results.

The Traditional Agency Model Is Best

At Spork, we’ve never accepted offers to work for a percentage of sales:

• We do good work for a fair price
• We’re focused on our client’s short and long-term growth
• We don’t crank up our prices or demand a tip when our services deliver good results

By offering our services for a flat fee, we can focus on providing good quality work that’s effective while also providing support.

And despite the fact that we’re not directly compensated for sales growth, our clients enjoy sales growth…often quite a bit of sales growth. Many of our clients have enjoyed years of above-average growth, in fact, and we’ve done it all for a flat fee too rather than taking a cut.

Performance-based marketing is alluring because it’s so easy:

• Many businesses don’t understand marketing, so they don’t know how to value it
• Doing the work to understand what agencies are offering, what it’s worth, and then vetting them is hard
• Hiring a performance-based marketing company is fast and easy and seemingly risk-free, but it’s usually the wrong move

Businesses that hire performance-based agencies save time and effort in the agency hiring process, but inevitably cost themselves piles of money as time goes by. Caveat emptor.

Related: Learn more about performance-based and revenue-based marketing agencies here.